2009 Year-End Estate Planning News

The year 2009 was marked by many changes affecting estate planning and related areas on the local, national and international levels, against a backdrop of continuing uncertainty as to how—or if—the federal estate and gift tax applicable exclusion amounts and rates may change for 2010. We are pleased to provide you with a summary of some of the most significant developments from the past year and expected future developments, along with recommendations for you to consider for year-end.

Where Will the Estate, Gift and GST Tax End Up in 2010?

If current law remains unchanged, in 2010 there will be no estate tax and no generation-skipping transfer (“GST”) tax, so that you may leave an unlimited amount to anyone free from those tax regimes. Under current law, in 2011 the estate and GST taxes are scheduled to return, with only a $1 million applicable exclusion amount for each (indexed for inflation in the case of GST tax exemption). It is widely expected that this result will not be allowed to occur, yet here we are in December, with no new legislation to resolve the issue of where our transfer tax system will end up. As of this writing, however, Democratic leaders are preparing an estate tax bill that would permanently extend the current transfer tax law. The legislation is expected on the House floor shortly. At the same time, H.R. 3905 (the “Estate Tax Relief Act of 2009”) was recently introduced. Under H.R. 3905, in each of the 10 years from 2010 through 2019, the estate tax applicable exclusion amount will increase by $150,000 while the top estate tax rate will decrease by 1%. The GST tax will track these changes. By 2019, the estate and GST exemptions will be $5 million and the estate and GST tax rates will be 35%. After 2019, the $5 million exemption would be indexed for inflation. H.R. 3905 does not reunify the estate and gift tax applicable exclusion amounts or allow a surviving spouse to use the estate tax applicable exclusion amount of the first spouse to die (i.e., “portability”). On November 18, the House Ways and Means Committee agreed to move forward with a one-year patch, maintaining the 45% rate and $3.5 million exemption for 2010. There was no timing announced for the consideration of this measure, except that it is to happen before Congress leaves for the year (although that remains to be seen).

As soon as Congress acts, we will provide you with an immediate update.

Federal Estate, Gift and GST Tax Exemptions

The estate tax exemption applicable exclusion amount increased from $2 million to $3.5 million per person in 2009—the single biggest increase ever. As mentioned above, if the law does not change, in 2010 only there will be no estate tax.

The GST tax exemption, which tracks the increase in the estate tax applicable exclusion amount, also increased to $3.5 million in 2009. In 2010 there will also be no GST tax, absent a change to current law.

The amount of lifetime gifts that may be made free from gift tax using the gift tax applicable exclusion amount (above and beyond the Annual Gift Tax Exclusion) remains frozen at $1 million even in 2010, absent a change to current law.

As soon as Congress acts, we will provide you with an immediate update.

Federal Estate, GST and Gift Tax Rates

The top federal estate tax and GST tax rates remained at 45% for 2009. As stated above, current law calls for the estate tax and GST tax to be repealed in 2010, for that year only. In 2011 the estate tax and GST tax are to return, with a top rate for each of 55%.

While the estate tax and GST tax are scheduled to be repealed under current law, the gift tax will remain in place in 2010, with any gifts beyond the applicable exclusion amount and Annual Gift Tax Exclusion amounts subject to tax at the top individual income tax rate, which is currently 35%. Under current law, in 2011 the top gift tax rate will return to 55%, like the estate tax and GST tax rate.

Annual Gift Tax Exclusion

Each year individuals are entitled to make gifts of the Annual Gift Tax Exclusion Amount without incurring gift tax or using any of their lifetime applicable exclusion amount against estate and gift tax. The amount of the Annual Gift Tax Exclusion will remain at $13,000 per donee in 2010. Thus, a husband and wife together will be able to gift $26,000 to each donee.

The amount of the Annual Gift Tax Exclusion with respect to gifts made to non-citizen spouses will increase from $133,000 to $134,000 in 2010.

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